Public policy
does not preclude enforcement in the United States of an arbitration award in
favor of the Iranian government, the Ninth U.S. Circuit Court of Appeals ruled
yesterday.

The panel
affirmed a district judge’s order confirming an award in favor of Iran’s
Ministry of Defense against Cubic Defense Systems, Inc., which is based in San
Diego. It sent the case back to the district court with instructions to
consider Iran’s motion for postjudgment interest and attorney fees.

Cubic’s dispute
with Iran goes back to 1977, when it entered into a contract to sell and
service an Air Combat Maneuvering Range for use by the Iranian Air Force. Like
other military items, however, the system went undelivered after the Iranian
revolution of 1979.

Swiss Panel

In 1991, Iran
invoked the arbitration clauses of its contracts with Cubic and called for
proceedings before the Zurich-based International Chamber of Commerce. The
panel ruled in favor of Iran, and in 1998 Iran petitioned the Southern District
court to confirm the $2.8 million award.

U.S. District
Judge Rudi M. Brewster of the Southern District of California granted
confirmation, which Cubic appealed. The appeal was suspended, however, after
Dariush Elahi filed a lien against the award to enforce a judgment obtained
under the Antiterrorism and Effective Death Penalty Act of 1996.

Elahi won a
judgment for more than $300 million after his brother, an Iranian-born U.S.
citizen, was murdered in Paris in 1990, reportedly by agents of the Iranian
regime. The U.S. Supreme Court ruled in 2009 that sovereign immunity barred
Elahi from collecting, and that an exception that might otherwise apply was
waived when Elahi accepted partial payment from the U.S. government under the
Terrorism Risk Insurance Act of 2002.

New York Convention

Resuming its
consideration of the Cubic appeal, the court heard argument earlier this year,
then asked the U.S. government for its views on whether public policy rendered
the award unenforceable. Public policy is one of seven defenses to the
confirmation of an arbitration award under the Convention on the Recognition
and Enforcement of Foreign Arbitral Awards, known as the “New York Convention.”

The government,
in a brief signed by lawyers from the State, Treasury, and Justice departments,
took the position that confirmation of the award would not violate public
policy.

Judge Raymond
Fisher, writing for the Ninth Circuit, agreed.

Cubic argued
that economic sanctions imposed by the United States on Iran, subsequent to the
seizure of Americans at our embassy there in 1979, reflected a public policy
against economic transactions with that country. It cited the requirement that
all such transactions be licensed by the Treasury Department’s Office of
Foreign Assets Control.

Fisher, however,
said the argument “gives too little weight to this country’s strong public
policy in support of the recognition of foreign arbitration awards, and too
much weight to the regulatory restrictions governing payment of the ICC’s
award.”

General License

The judge noted
that OFAC has issued a general license authorizing the transfer of property
interests acquired after January 1981. While other aspects of the regulations
may require Cubic to obtain a special license before it can pay the award,
nothing in those rules precludes the courts from confirming it, Fisher added.

As to Cubic’s
claim that it faces a “nightmare” scenario, because it could conceivably be
prosecuted if it pays the award and suffer the consequences of an unsatisfied
judgment if it does not, Fisher said Cubic could resolve the dilemma either by
asking OFAC for a special license or asking the district judge for a stay of
execution.

Fisher went on
to say that Brewster erred in concluding that he could not grant postjudgment
attorney fees or costs—which Iran sought on the ground that Cubic had refused
in bad faith to pay the award—because there was no statute or rule expressly
authorizing such an award. The appellate jurist explained that federal courts have
inherent authority to award costs and fees as sanctions for bad faith or
vexatious litigation conduct in federal question cases.